Unit 4: Midterm Exam
Instructions
Directions
The midterm exam covers material from week one through week three
(Chapters 1 through 5).
The exam consists of 30 multiple choice questions.
You will have 90 minutes to complete the midterm
exam. You are only able to take the exam once.
The exam is open textbook and open
notes. The exam is not proctored.
Question 1
pts
Which of the following statements is CORRECT?
For a stock to be in equilibrium, its intrinsic value must be greater than the actual market price.
Conflicts can exist between stockholders and managers, but potential conflicts are
reduced by the possibility of hostile takeovers.
Corporations and partnerships have an advantage over proprietorships because a
proprietor is exposed to unlimited liability, but the liability of all investors in the other
types of businesses is more limited.
Most business in the U.S. is conducted by corporations, and corporations'
popularity results primarily from their favorable tax treatment.
A good goal for a firm's management is the maximization of expected EPS.
Question 2
, pts
Multiple Choice: Conceptual
Please note that some of the answer choices, or answers that are very close, are used in different questions.
This has caused us no difficulties, but please take this into account when you make up exams.
Which of the following statements is CORRECT?
Proprietorships and partnerships generally have a tax advantage over corporations.
In any partnership, every partner has the same rights, privileges, and liability exposure
as every other partner.
Corporations of all types are subject to the corporate income tax.
One of the disadvantages of incorporating your business is that you could become
subject to the firm's liabilities in the event of bankruptcy.
Proprietorships are subject to more regulations than corporations.
Rationale:
Some corporations (S corporations) are able to avoid the corporate income tax. Proprietorships
and partnerships pay personal income tax, but they avoid the corporate income tax.
Rationale:
Some corporations (S corporations) are able to avoid the corporate income tax. Proprietorships
and partnerships pay personal income tax, but they avoid the corporate income tax.
Question 3
pts
Which of the following statements is CORRECT?
, Because bankruptcy requires that corporate bondholders be paid in full before
stockholders receive anything, bondholders generally prefer to see corporate managers
invest in high risk/high return projects rather than low risk/low return projects.
One drawback of forming a corporation is that you lose the limited liability that you
would otherwise receive as a proprietor.
Since bondholders receive fixed payments, they do not share in the gains if risky projects
turn out to be highly successful. However, they do share in the losses if risky projects fail and
drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate
managers invest in low risk/low return projects rather than high risk/high return projects.
Potential conflicts between stockholders and bondholders are increased if a firm's
bonds are convertible into its common stock.
One advantage of operating a business as a corporation is that stockholders can deduct
their pro rata share of the taxes the firm pays, thereby eliminating the double taxation
investors would face in a partnership.
Question 4
pts
Which of the following statements is CORRECT?
The CFO is responsible for raising capital and for making sure that capital
expenditures are desirable, but he or she is not responsible for the validity of the
financial statements, as the controller and the auditors have that responsibility.
The CFO generally reports to the firm's chief accounting officer, who is normally the controller.
The board of directors is the highest ranking body in a corporation, and the chairman of the
board is the highest ranking individual. The CEO generally works under the board and its
chairman, and the board generally has the authority to remove the CEO under certain
conditions. The CEO, however, cannot remove the board, but he or she can endeavor to
have the board voted out and a new board voted in should a conflict arise. It is possible for
a person to simultaneously serve as CEO and chairman of the board, though many
corporate control experts believe it is bad to vest both offices in the same person.
In most corporations, the CFO ranks above the CEO.
By law in most states, the chairman of the board must also be the CEO.
Instructions
Directions
The midterm exam covers material from week one through week three
(Chapters 1 through 5).
The exam consists of 30 multiple choice questions.
You will have 90 minutes to complete the midterm
exam. You are only able to take the exam once.
The exam is open textbook and open
notes. The exam is not proctored.
Question 1
pts
Which of the following statements is CORRECT?
For a stock to be in equilibrium, its intrinsic value must be greater than the actual market price.
Conflicts can exist between stockholders and managers, but potential conflicts are
reduced by the possibility of hostile takeovers.
Corporations and partnerships have an advantage over proprietorships because a
proprietor is exposed to unlimited liability, but the liability of all investors in the other
types of businesses is more limited.
Most business in the U.S. is conducted by corporations, and corporations'
popularity results primarily from their favorable tax treatment.
A good goal for a firm's management is the maximization of expected EPS.
Question 2
, pts
Multiple Choice: Conceptual
Please note that some of the answer choices, or answers that are very close, are used in different questions.
This has caused us no difficulties, but please take this into account when you make up exams.
Which of the following statements is CORRECT?
Proprietorships and partnerships generally have a tax advantage over corporations.
In any partnership, every partner has the same rights, privileges, and liability exposure
as every other partner.
Corporations of all types are subject to the corporate income tax.
One of the disadvantages of incorporating your business is that you could become
subject to the firm's liabilities in the event of bankruptcy.
Proprietorships are subject to more regulations than corporations.
Rationale:
Some corporations (S corporations) are able to avoid the corporate income tax. Proprietorships
and partnerships pay personal income tax, but they avoid the corporate income tax.
Rationale:
Some corporations (S corporations) are able to avoid the corporate income tax. Proprietorships
and partnerships pay personal income tax, but they avoid the corporate income tax.
Question 3
pts
Which of the following statements is CORRECT?
, Because bankruptcy requires that corporate bondholders be paid in full before
stockholders receive anything, bondholders generally prefer to see corporate managers
invest in high risk/high return projects rather than low risk/low return projects.
One drawback of forming a corporation is that you lose the limited liability that you
would otherwise receive as a proprietor.
Since bondholders receive fixed payments, they do not share in the gains if risky projects
turn out to be highly successful. However, they do share in the losses if risky projects fail and
drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate
managers invest in low risk/low return projects rather than high risk/high return projects.
Potential conflicts between stockholders and bondholders are increased if a firm's
bonds are convertible into its common stock.
One advantage of operating a business as a corporation is that stockholders can deduct
their pro rata share of the taxes the firm pays, thereby eliminating the double taxation
investors would face in a partnership.
Question 4
pts
Which of the following statements is CORRECT?
The CFO is responsible for raising capital and for making sure that capital
expenditures are desirable, but he or she is not responsible for the validity of the
financial statements, as the controller and the auditors have that responsibility.
The CFO generally reports to the firm's chief accounting officer, who is normally the controller.
The board of directors is the highest ranking body in a corporation, and the chairman of the
board is the highest ranking individual. The CEO generally works under the board and its
chairman, and the board generally has the authority to remove the CEO under certain
conditions. The CEO, however, cannot remove the board, but he or she can endeavor to
have the board voted out and a new board voted in should a conflict arise. It is possible for
a person to simultaneously serve as CEO and chairman of the board, though many
corporate control experts believe it is bad to vest both offices in the same person.
In most corporations, the CFO ranks above the CEO.
By law in most states, the chairman of the board must also be the CEO.
